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Dear Investors,
Happy Nvidia earnings day.
Yes, that’s a thing now. Perhaps more important than that other day in February (14th)?
Nvidia released its 2025 results on Wednesday (26 Feb) and the memes were out in force. I've included a few below for your amusement. They will give you a sense of how important investors consider Nvidia’s results.
In this edition, we look at how the market reacted and what we think about the results.
Efficient Market Hypothesis (EMH)
Nvidia’s 2025 results
ROA analysis
Q&A
Nvidia meme
Efficient Market Hypothesis (EMH)
The Efficient Market Hypothesis (EMH) is a theory that says stock prices reflect all available information, making it difficult to consistently outperform the market. It has three forms, each building on how much information is priced in:
Weak Form: Stock prices include all past price and trading data. This means you can’t use historical trends (like chart patterns) to predict future prices and beat the market.
Semi-Strong Form: Prices reflect all publicly available info - past data, company announcements, news, financial reports, etc. Even with this knowledge, you can’t consistently get an edge.
Strong Form: Prices account for everything - public info and private info (like insider secrets). Even insiders with exclusive knowledge can’t reliably outperform the market.
The stronger the form, the more it assumes markets are unbeatable because everything’s already baked into the price!
Nvidia is officially followed by three dozen Wall street analysts and probably hundreds more unofficially around the world.
You might guess that at the very least, the semi-strong form of EMH would be applicable to Nvidia. That would mean that Nvidia’s financial performance would be anticipated by analysts and the stock price would reflect that information. In that case, we would expect very few surprises in the financials and not much market reaction after the results announcement.
Let’s see what actually happened.
Nvidia meme
Nvidia’s 2025 results
Nvidia released results after the market closed on Wednesday and they were amazing:
Revenue increased by 114% from $60 billion to $130 billion.
Net income increased by 145% from $30 billion to $73 billion.
Free cash flow increased by 125% from $27 billion to $61 billion.
Wall street expected earnings per share of $0.85 and the company delivered $0.89. This was a positive surprise of 5%. The company beat expectations (again), so you might expect that the share price would respond positively.
It didn't.
In fact, it dropped 8% from $131 to $120. That’s a $268 billion drop in market value in one day. So much for semi-strong EMH - clearly the market found out something it hadn’t anticipated.
Nvidia's share price dropped 8% on February 27, 2025.
ROA analysis
Nvidia did brilliantly in the past year and the numbers show it. Revenue is up and free cash flow is up. Return on capital employed (ROCE) is sky high at 87%. Remember our rule of thumb is that 15% is good.
Nvidia financial summary
But is Nvidia’s stock price tracking fundamentals?
In simple terms, a stock’s price can be calculated with price-to-earnings ratios (i.e. the P/E ratio), using this formula:
Stock price = Earnings per share x P/E ratio
From this formula, we can see that the stock price is affected by two things:
How much earnings increased over the past year (i.e. company financial performance).
How much the P/E ratio changed (i.e. the multiple the market is willing to pay)
Lets use this to break down Nvidia’s performance.
Over the past year, the share price increased by 96% from $61 to $120. In that same period earnings per share increased 147%, while the P/E ratio decreased by 20%.
We can see that the company’s financial performance improved faster than the share price, because investors were not willing to pay the same multiple as they were a year ago. This change in investor sentiment could be because growth is slowing with size, it could be uncertainty in the market or it could be the fast changing nature of technology.
When it comes to stock price movements, here’s what you want to see:
Ideally financial performance and stock price move together. This tends to happen over long periods of time.
The next best scenario is where the financial performance moves ahead of the stock price (our situation) - it means the company is doing well but the stock price didn’t keep up.
The most risky scenario is where the stock price moves ahead of the financial performance - this means expectations (or speculation) is increasing but there is no financial performance to back it up.
Nvidia meme
Conclusion
Generally speaking, some form of market efficiency does exist. These days it has been slightly diminished by an increase in passive investing. Passive investing means buying an index (i.e. many companies) without analysing the companies. On the other hand active investing means building a portfolio based on detailed analysis of each company. This type of investing is necessary to keep stock market prices rational, but it costs more to do. For that reason, investors are leaning toward passive investing.
In terms of Nvidia’s stock price drop, I suspect that investors are nervous and the market reacted by dropping. Despite that, I am comforted to see that earnings outpaced stock price growth. This makes Nvidia less risky.
My valuation for Nvidia is $165. This is higher than the current stock price of $125. No surprises here - the title hinted at this.
Q&A
What companies are you looking at?
Investors normally don’t tell anyone what they are looking at. They worry that others will buy the stock ahead of them and push prices up. Perhaps that’s understandable if you run a fund.
But ROA is about sharing, so here goes. These are all the companies I looked at in February (in date order):
Meta
Abbvie
Ametek
Autodesk
Broadridge
Cavco Industries
CBOE Global Markets
Celsius
Chemed
CME Group
Comfort Systems
CommVault
Costco
MSCI
Adobe
Apple
Booking Holdings
Coca-Cola Consolidated (we previously owned this)
Ford Motor Company
Google (Alphabet)
McDonalds
Netflix
Palo Alto Networks
Visa
3M
Cryo Cell
Herbalife (I wanted to see if it was pyramid scheme as was once claimed)
HP
Idexx
Johnson & Johnson
Uber
Mastercard
Nvidia (for this newsletter)
That's a lot of companies, but we have a clear analysis process, so I move on quickly if I don’t find what I’m looking for. Not all these companies are extraordinary, but some are. DYODD (do your own due diligence) before buying or selling.
What did you conclude from this list?
US companies are highly valued and it concerns me. In fact, I’ve been thinking of adjusting our portfolio strategy. Strategy means what and where we are invested. It does not mean changing our investment philosophy. Our investment philosophy remains investing in Extraordinary Companies. This will remain our North Star.
I cannot make any conclusions on Herbalife’s bona fides. But I can tell it’s not for me.
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